Frankfurt - The European Central Bank (ECB) raised interest rates for
the second time this year on Thursday and signalled further policy
tightening to come to tackle inflation, despite the eurozone’s
intensifying debt crisis.
But it offered help to hard-pressed
Portugal after rating agency Moody’s downgraded its debt to junk status
this week, committing to keep providing it with liquidity.
will continue to monitor very closely all developments with respect to
upside risks to price stability,” Trichet told a news conference after
the bank raised interest rates by 25 basis points to 1.5%.
said before the news conference that use of that phrase would signal a
further rate rise in 2011, likely to be in the last three months of the
Eurozone inflation held at 2.7% in June, well above the
ECB’s target of just under 2%. Trichet said monetary policy remained
accommodative even after Thursday’s increase.
The rise in the
ECB’s benchmark interest rate to 1.5% was widely expected after the
bank’s recent reiterations that it was in “strong vigilance” mode - code
traditionally used to signal a hike.
“No surprise at all,” Berenberg economist Holger Schmieding said of Thursday’s quarter-point rise.
ECB raised its subsidiary overnight deposit and borrowing rates in
unison, opting not to re-widen its so-called rate corridor this time
Recent eurozone data has generally disappointed. The
latest industrial orders rose less than expected, while growth in the
bloc’s dominant service sector has also slowed sharply.
Reuters poll found economists have softened their rate hike view as the
eurozone debt crisis has escalated over the last month.
ECB’s key rate is expected to rise just once more this year, to 1.75%,
with only two quarter-point increases forecast to follow for all of next
In contrast, the Bank of England kept rates on hold on Thursday. Helping hand to Portugal
downgrading of recently bailed-out Portugal’s credit rating to junk
rattled financial markets on Wednesday and cast new doubt on European
efforts to rescue distressed eurozone states without debt restructuring.
The ECB has pledged to keep liquidity flowing to eurozone banks
that need it, and Trichet said Portuguese debt would be accepted by the
ECB as collateral for now, come what may.
“We have decided to
suspend the application of the minimum credit rating threshold... for
the purpose of Eurosystem credit operations in the case of marketable
debt instruments issued or guaranteed by the Portuguese government,” he
“This suspension will be maintained until further notice.”
ECB has proved a major stumbling block in agreeing a second rescue plan
for Greece, as it has threatened to refuse restructured Greek bonds as
collateral in its lending operations in the event of a default or a
“restricted default”, which rating agencies are threatening to impose.
“We say no to selective default,” Trichet said.
to accept Greek bonds as collateral would deprive Greek banks of the
funds on which they rely, crippling the Greek economy and risking
contagion to other eurozone economies. Most economists expect the ECB to
baulk at that and keep banks afloat somehow.